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Financial Literacy

62 Investment Terms Beginning Investors Should Know

If you’re new to the world of investing, it can be intimidating to hear new terms. That’s why we put together this list of investment terms. These words and concepts can help you get a better understanding of the investing world.

Whether you’re a novice or expert, the list below can come in handy. Let’s dive in…

Investment terms to help beginners get started.

Investment Terms Every Investor Should Know

  1. Annualized Rate of Return – The average annual return over a defined period of years, including the effect of compounding. Another term for this is compound annual growth rate.
  2. Annual Report – An audited report of a corporation or mutual fund’s condition and performance that is given to shareholders every year.
  3. Ask Price – The lowest price an owner is willing to sell an asset, such as stock.
  4. Asset – Property that was developed or purchased and has value. This can include stocks, bonds, real estate, patents and other investments.
  5. Asset Allocation – Dividing investments among different asset classes, such as bonds and stocks, to balance risk and reward according to personal investment needs.
  6. Asset Class – A grouping of securities with similar features. The most common asset classes are stocks, bonds and cash equivalents.
  7. Balance Sheet – A statement showing an entity’s financial position by reporting on assets, liabilities and shareholders’ equity on a specific date (commonly at the end of an accounting period). It shows what a company owns and owes, as well as shareholders’ ownership.
  8. Bear Market – A bear market is a period of falling stock prices, usually by 20% or more. It’s often tied to a recession and it’s the opposite of a bull market (investment term defined below).
  9. Beta – A measurement of a stock’s price volatility. A beta of 1 is neutral, while above 1 is more volatile and below 1 is less volatile.
  10. Bid Price – The highest price a buyer is willing to pay for an investment.
  11. Board of Directors – Elected by stockholders, they work for the stockholders by protecting their interests. This is done by voting on decisions. For example, whether or not to merge with another company.
  12. Bonds – Loans given with promises to pay a specified amount on a specific date or when a certain criteria is met. In addition to the principal amount, interest payments are also included in the loan payback.
  13. Book Value – If you take all the liabilities a company has, and subtract them from the assets and common stock equity of the company, what you would have left is the book value. Most of the time, the book value is used as part of an evaluative measure, rather than being related to a company’s market value.
  14. Broker – An entity that buys and sells investments on behalf of the investor. There’s often a fee for this service.
  15. Bull Market – A market where values and prices are in an upward trend. The opposite of a bear market.

A bull market is an upward trend in market value and prices.

  1. Capital – The funds invested in a company or other assets. Capital is often obtained by issuing stock, retaining the company’s earnings or by borrowing.
  2. Capital Gain or Loss – The difference between what you bought an investment for and what you sell it for. If the result is positive, it’s a gain. If the result is negative, it’s a loss.
  3. Diversification – The practice of allocating funds into different investments and markets, such as energy, healthcare, etc. Ideally, this practice leads to better risk-adjusted returns.
  4. Dividends – Payments of an entity’s after-tax profit to shareholders according to the class and number of shares they hold. This is a common source of income for investors.
  5. Dow Jones Industrial Average (Dow) – The most common indicator of stock market performance, the Dow is an average of 30 actively traded blue chip stocks and is used to analyze the health of the overall market.
  6. Equities – Company-issued shares representing ownership in the company.
  7. Exchange-Traded Funds (ETFs) – Funds similar to mutual funds but traded on stock exchanges during the day as if they were stocks.
  8. Expense Ratio – A number representing the annual amount shareholders pay in fund expenses and fees as a percentage of total investments.
  9. Fund – Money put together by a group of investors to buy securities.
  10. Growth Investing – Investment practice focusing on stocks with quickly growing earnings that are anticipated to continue growing in the future.
  11. Hedge Fund – Headed by a manager (typically a registered investment advisor), these funds are for eligible qualified investors to pool their money and invest.
  12. Income Statement – A summary of a company’s performance determined by the organization’s profitability over a period of time. Also known as the profit and loss statement.
  13. Index – An investment index measures the performance and price movements of many investments to determine the overall performance of a specific investment type or sector. The S&P 500 and Dow are two of the most common indexes.
  14. Index Fund – A mutual fund or ETF that invests in assets in an index, generating returns that mimic those of the index itself. These funds can be cost-efficient with low expense ratios.
  15. Inflation – An increase in the price of goods and services and a decrease in the purchasing value of money.
  16. Initial Public Offering (IPO) – The process of issuing shares of a private company to the public market, transitioning the company from private to public.
  17. Interest – The charged fee for borrowing money, often a percentage of the amount borrowed.
  18. Investment Mandate – Rules and objectives used in the management of a specific portfolio or fund.
  19. Individual Retirement Account (IRA) – A tax-advantaged investing tool used to save funds for retirement.
  20. Liquidity – The ability to convert assets to cash or easily accessible money. Mutual funds are a good example because shares can be redeemed on any business day for their current value on that day. On the other hand, a house wouldn’t be a very liquid investment.
  21. Market Capitalization – The market cap of a company is calculated by taking its current share price and multiplying it by the number of shares outstanding.
    1. Small cap – less than $3 billion
    2. Midcap – between $3 and $10 billion
    3. Large cap – greater than $10 billion
  22. Money Market – An interest-bearing account, typically with a higher interest rate than a bank savings account.
  23. Mutual Fund – A pool of money operated and managed by an investment company.
  24. Nasdaq – A computerized marketplace for the buying and selling of securities traded over the counter and even some NYSE listings. It is an acronym for National Association of Securities Dealers Automated Quotations system.
  25. New York Stock Exchange (NYSE) – Located in New York City, the New York Stock Exchange is the largest equities-based exchange. It trades stocks from both U.S. and international companies.

The New York Stock Exchange takes up 21 rooms.

  1. Par Value – The face value or price that will be repaid when a bond matures.
  2. Portfolio – A collection of investments owned by an individual or entity. In a portfolio, all investments are managed collectively to meet specific goals and objectives.
  3. Premium – The difference when a bond is sold above its par value. Stocks can also trade at a premium based on estimated value.
  4. Price-to-Earnings (P/E) Ratio – This tool measures the relationship between the price of a company’s share and its earnings per share (EPS). To calculate the ratio, take the price of the share and divide it by the EPS. For example, is a company’s share is worth $100 and it reports it earned $5 per share, that would be a P/E ratio of 20.
  5. Prospectus – A legal document provided to investors who are interested in a financial security and need to make an informed decision. It contains business operations, financial statements, operations results, risk factors and management. Audited financial statements must also be included. This information is required by the SEC.
  6. Recession – A period of decline in economic activity and often defined by a continuous decline in gross domestic product (GDP) for two consecutive quarters. Recessions can potentially lead to high unemployment and market crashes.
  7. Registered Investment Advisor (RIA) – An individual who has undergone financial investment training, completed certification, and agreed to adhere to certain rules in order to ensure recommendations and trades are made on the customer’s behalf and in the customer’s best interest to properly meet their investment goals.
  8. Reinvestment Option – Refers to an arrangement under which a mutual fund will apply dividends or capital gains distributions for its shareholders toward the purchase of additional shares. To see how dividend reinvestment works, check out our free dividend reinvestment calculator.
  9. Risk Tolerance – The amount of volatility you allow in your investments and portfolio.
  10. Sector – A group of similar securities in a specific industry. The stock market has 11 major sectors, each representing a key area of the economy. Some examples are healthcare, technology and finance.
  11. Securities and Exchange Commission (SEC) – Created by the Securities Exchange Act in 1934, the SEC is a federal organization that governs and enforces the laws of the security industry to protect investors and maintain efficient markets.
  12. Share – An unit of investment that represents ownership in an entity, such as a share of a stock or a mutual fund. Shares are usually issued when companies or funds want to raise capital.
  13. Short Selling – Short selling occurs when an investor borrows shares of an asset. They then sell the shares – pocketing the money – with the promise of returning the same number of shares in the future. Short sellers hope prices decrease so they can buy back the shares at a lower price and keep the difference. It should be noted that this is an advanced practice that carries high risk.
  14. Stock – Often used interchangeably with share, stock represents an investors ownership in a company.
  15. Stock Exchange – A stock exchange is an entity that hosts a market for buyers and sellers. Exchanges are usually open for trading during specified hours. The New York Stock Exchange is the biggest stock exchange in the world. Companies that want their shares listed must meet strict criteria and are constantly at risk of being de-listed if they fail to do so.
  16. Stockholder – Someone who owns common or preferred stock of an entity. Also called a ‘shareholder.’
  17. Standard & Poor’s Index (S&P 500) – A measurement of the performance of about 500 largely held common stocks as an indication of changes in the U.S. stock exchanges.
  18. Tax-Advantaged Accounts – Investment accounts that allow you to reduce taxes on your income. For example, a traditional IRA is tax-deferred, and a Roth IRA is tax-exempt.
  19. Valuation – An estimated value or worth of an asset. Investors use their estimated asset valuations and compare them to market prices. This helps determine what assets are worth buying and selling.
  20. Volatility – How much and how often an investment’s value fluctuates. High volatility assets are generally considered high risk.
  21. Volume – The total number of shares being traded on the entire market during a specific period of time. Each transaction within operating hours adds to the total volume count.
  22. Yield – The percentage of return on capital represented by the investment income expressed as a percentage of the price.

By understanding these investment terms, you’re one step closer to accomplishing your investment dreams. For your next step, check out our Investing 101 page. Or sign up for our free e-letter below for investment tips and insight.


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